Monday, December 21, 2009

Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB/Madoff, W. & Tiger/

1. ZBPRA v. ZBPRC: This is my analysis of just the second issue raised in the post from yesterday. ZBPRC vs. ZBPRA This kind of analysis is merely instructive on how I would compare the two securities. Ultimately, I have to make a decision just based on the current dividend yield and reasonable expectations about the future. This kind of analysis is routine for me in making security selections. In this blog, I have performed similar types of analysis with the Bank of America and Goldman Sachs Floaters: Analysis of Prior Question about Goldman Sach's Floaters; Item #4 /Comparing Floating Rate Securities; & Item # 6 BMLPRH vs. BMLPRJ. This is a more complicated analysis than identifying which functionally equivalent security provides the highest yield at the moment in time that I decide to buy one of them. Functional Equivalence in Bond Trading And it is time consuming like my effort to determine at a given moment in time whether or not the TC IPB represents good value. Calculations On How to Recreate Trust Certificate IPB. And, once I do the calculations and the prices change significantly, I have to do it all again with new inputs:

ZBPRC Annual Penny Rate=$2.375
ZBPRA Annual Penny Rate Now Based on Guarantee as Applicable Rate: $1.

Each example assumes the purchase of $5,000 at the price shown:

ZBPRC 254 shares at $2.375 annually per share dividends = $603.25 (shares bought at $19.7 hypothetically)

ZBPRA 402 shares at $1 annually per share = $402 (shares bought at closing price last Friday at $12.44)

ZBPRA 455 shares at $1 annually per share = $455 (shares bought at $11)

So even if ZBPRA fell from its current level to $11, and was bought at $11, it would generate less income than ZBPRC bought at Friday's closing price.

If I had bought $5000 of ZBPRA at $7.8, rather than the 100 shares actually bought, I would have 641 shares, and then I would have $641 in income, which finally would exceed the ZBPRC bought hypothetically last Friday at $19.7. So, it is clear that ZBPRA would have to fall a lot from its current price before it would provide more current income than ZBPRC.

Now, what is the value of the float? Does it make up for the current income differential? My first reaction to the Libor float in ZBPRA is that it is mediocre. The float in METPRA is almost twice as much. On the other hand, ZBPRA is currently selling near 1/2 of its par value so that makes the float far more attractive to a new buyer. If bought at $12.50, that float's real value to me is 1.06% over three month Libor. And that would be a good float.

To give an example of what I mean, assume one investor buys 100 ZBPRA at $25 and another is more fortunate buying the same number of shares at $12.5. Further assume that LIBOR has increased from the current .25% to 5%. Both investors would be receiving the same dollars in dividends. The dividend would be calculated as follows: .0553% x $25 par value=$1.3825 for 1 share x 100 shares=$138.25. Sure, both investors receive that same $138.25 for their 100 shares. But what is their respective yields based on their costs. The investor at $25 would have a yield of 5.53% whereas the one who bought at $12.5 would be twice as much-11.06%. The value of the Libor float is twice as valuable when you buy it at 1/2 of par value compared to buying it at par value.

The problem is that the buyer of ZBPRA is suffering a significant current yield disadvantage compared to the ZBPRC buyer in my hypothetical. The question that I would ask myself is how far will Libor have to increase before ZBPRA would overtake ZBPRC in income generation, and historically, how frequent would that rate have to be?

Let's run the numbers at 4.5% 3 month Libor and assume ZBPRA was bought at the $11 price, lower than the current price:

.0503% x. $25=$1.2575 x. 455 shares= $572.16. Okay, that tells me a lot. I am still earning less than ZBPRC even at 4.5% 3 month Libor.

Lets bump it to 5%: .0553% x. 25= $629. Okay, I have finally exceeded the income generated by the hypothetical ZBPRC purchase by a few bucks but it took a rise in the 3 month LIBOR to 5% from the current .25% to do it, and a buy of ZBPRA below where it is now.

This analysis so far obviously tilts the decision toward ZBPRC, but there are a few other considerations of import. One of my readers came up with the 20 average of 3 month LIBOR at close to 5%. If the security was held for 20 years, and the past is prologue, always a very dicey proposition, then there would be equality over a long period of time provided ZBPRA was bought at $11 rather than the current price, the future average of LIBOR is around 5% ( a little greater for some complicated reasons which I have explained in the past), and the securities are held for the long term. Another consideration is that ZBPRA is selling at a much larger discount to par value than ZBPRC. While Zions does not have to call these perpetual securities, a call would result in a higher capital gain for the ZBPRA owner. I would view a call down the road of ZBPRC to be more likely however, given its high coupon, assuming Zions recovers and can finance at a significantly lower rate when it is permitted to call ZBPRC after 9/15/2013. (see generally discussion at item # 8: Bought 30 ZBPRC at 18.4/) Possibly, under a prolonged period of very high Libor rates, and an inverted yield curve, Zions might consider calling ZBPRA. Lastly, there is no cap on ZBPRA. What if we enter a hyper inflationary period like the 1970s and short rates rise to say 15%? Well, that is obvious, the floater would look very good if bought at $11, yielding over 30%.

One question that I will not address here is the credit concerns issues, which I have talked about in several posts dealing with Zions. I hold this bank in very low regard. It is impossible for me to call the funding of the real estate bubbles in Arizona and Nevada as anything other than stupid. These equity preferred securities are rated junk and deservedly so. Zions is losing a lot of money now. So, to answer my own question, I would not invest $5,000 in Zions' securities. Instead I have limited my exposure to about two thousand, in three different securities. The third is a junior bond, ZBPRB that I bought at a tad under twenty bucks with a 10% yield. Its distribution can not be eliminated but only deferred with interest. /Bought 50 ZBPRB in Roth at $19.9 ZBPRB is a typical trust preferred. The dividends for ZBPRA and ZBPRC, of course, can be eliminated, just like the common stock dividend. The only protection against an elimination is that Zions would have to eliminate that 1 cent a share common dividend and defer paying the government on its preferred stock which is in parity with the publicly traded equity preferred shares.

Another question or problem is whether an investor would take the lower yielding cumulative Trust Preferred, ,ZB.PRB over the higher yielding non-cumulative equity preferred ZBPRC. There is a significant yield advantage now in favor of the ZBPRC, over 2% in favor of the fixed coupon equity preferred which pays qualified dividends. The TP pays interest. BUT, the TP has a maturity date. So my resolutions was to buy 100 of the ZBPRA at $7.8, 50 of the ZBPRA at $19.9 and 30 ZBPRC at $18.4. If I had to allocate two grand to it today, I would do it differently.

2. Frank Rich Connecting Tiger Woods, W & the Dark Force, Madoff and Enron: Frank Rich's column, titled "Tiger Woods, Person of the Year" in the Sunday NYT attempts to connect the Tiger Wood's public persona scam with other famous scams of the past ten years. I thought that this column needed an editor, where the point is made in a summary and cogent fashion at the start of his column, rather than rambling back and forth between diverse subjects and then forcing the reader to connect the dots. That is what we call here at HQ a typical RB problem.

Our resident RB here at HQ has been drawing these kind of connections for months, possibly in a more coherent way which is saying a lot for our RB, who is rarely coherent. Maybe Frank reads my posts. For example, in a post from last December, RB wrote the following: "Somehow the lies told by Bush and Cheney to justify the invasion of Iraq keep coming up in my mind whenever I think about Bernie Madoff." Curveball and Madoff: I can not help but connect them (see also: Accurate Information is Not a Side to an Issue/ W & the Housing Crisis/Lying Works In Politics Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent?) The core of the problem is frequently an unwillingness to be skeptical which is frequently forged by accepting statements without question. Just tell me what to think. Frank laments that so many accept the line now that Bush and Cheney were really victims of bad intelligence when making what turned out to be false representations to justify the invasion of IRAQ. It is really simple as to why that happens. Republicans accept the line because those politicians are labelled Republican and are therefore deemed to be kosher. If W had been a Democrat making those representations, the GOP tribe members would be focusing on the vast array of information that proves beyond a reasonable doubt that W misrepresented what was known, and elevated clearly unreliable information as factual. They would have been searching out all confirmatory data being given to them by Fox News and the Limbaughs of the world, which would be fed to them in a steady diet to the point that virtually all GOP tribe members would accept that W and the Dark Force misled the country intentionally.

Similarly, Madoff appeared to be kosher to those who gave him money. Like many of the scam artists later exposed in what became a cockroach epidemic of ponzi schemes hatched by "financial advisors" for the well to do, he gave to charity, using of course money given to him to invest. This is what I said about Bernie and others like him: " Being seen as working for charities appears to be an essential element in convincing others that the scam artist is really a decent and honorable person. Charity work is just part of their shtick and how many make their contributions to charity with the very money that others are entrusting them to invest." More Madoffs? Shtick is a good word for it. Yes, just attach a label to a person and forget about thinking for yourself, so Bernie is stamped with the label kosher by the right people, and then someone points out that he is generous with his time and money to all kinds of charities. An advisor is hired, who rakes off millions off the top to perform due diligence, which I describe in another post from December in this manner: "The advisor's understanding of that duty would be a cursory examination of Madoff's claimed strategy and purported historical returns, a call to someone equally without a clue to determine he was a Mensch, followed by eighteen holes on the golf course and a subsequent month long trip to the Riviera in a yacht for some sun and fun." Random Observations: Madoff, Sarah

It is really the same process at work , and at its heart is an unwillingness to look at representations in a skeptical manner without pre-existing biases, and to gather and evaluate information from a variety of sources to challenge what you are being told. So, the same mind set is at work in accepting Madoff as an investment guru, Enron as a new model for American industry, or W's claims that he was the victim of bad intelligence.


  1. The magnitude of "legal fraud" perpetrated by financial advisors operating within the law everyday selling individuals (often successful, intelligent people) on "customized" portfolio management and taking 1-2% of assets (not to mention the expenses lost in what they invest in) regardless of performance is actually sad. However, these advisors create thousands of jobs and creates huge wealth amongst a few insanely wealthy individuals, one of which I worked for. Wish I could be paid literally 10's of millions every year for, on average, underperforming my benchmark indexes.

  2. Lurther: I take it that you are retired.

    If one thing is clear, competence and compensation are not related to one another in the financial services industry. My background is in law, primarily litigation and entertainment contract negotiation.

    One of the most egregious examples of "legal" compensation was the hundreds of millions paid to a few individuals in AIG's Financial Products unit in London to write credit default insurance, which ultimately destroyed the world's largest insurance company and would have without massive government infusions of capital.

    I have never worked in the financial services industry, and would not even consider hiring anyone to manage my money. I have had that attitude since I was about 13.

    Most passive investors would be better off with low cost ETFs than with mutual funds. The hedge funds seem to have a better racket, charging that 1 or 2% and 20% of the profits.

    I would add that I am dismayed by so many individuals plowing money into bond funds now after selling stock funds at or near the bottom.

  3. Finance needs to be adopted as a formal curriculum taught in high school. If I am required to learn caculus I can handle discounted cash flow analysis, current yield, etc.
    No, not retired. In fact most of my investable assets were acquired not in the finance industry but the software industry in Silicon Valley.
    My interest these days is to ride the next wave in our economy, "anything but fossil fuels," to renewable/alternate energy sources. The Beanpole seems to get it, at least in theory.

  4. I am riding the wave of whatever pays me good interest and dividends & whose businesses do not offend me.

    I have some small exposure in two ETFs in alternative energy that have gone nowhere. One is the Claymore sponsored Global Solar Energy (TAN)

    The other is sponsored by Powershares called WilderHill Clean Energy (PBW).

    My total exposure is about 1 thousand dollars. I was however contemplating increasing it some.

    I do not pick individual stocks in this sector. These kind of ETFs, and Powershares has several of them, do not generate any dividends for Headknocker.

    I have never had a course in finance or economics or accounting.

    Over the long haul as an investor, success or failure depends on just controlling impulses, what some call the reflexive part of the brain, and to perform careful reflective analysis before making a decision. This will not prevent mistakes, but will over time keep them to a minimum.

    And, there are always tried and true ways to value companies, or to know when an asset class is in a bubble, whether it be stocks, bonds, or homes, and those time tested ways should never be disregarded.